Financing Through Friends, Family, and Crowdfunding

You’ve tapped out your savings account, taken out a home equity loan, borrowed against your life insurance policy and you STILL need more money for your business. If you’ve decided against traditional funding (like a bank loan), you might be thinking of asking friends and family for help, or using some type of crowdfunding site. Here’s a bit of info to consider before taking that next step.

Friends and Family

Financing through family and friends can be a win-win for everyone, but it can also become a problem fast if not well planned. Before reaching out, it’s a good idea to do a little research on using your personal network to fund your business. Browse through 6 Tips for Borrowing Start-Up Funds from Friends or Family for some best practices to consider before reaching out to your personal network.

Crowdfunding

Crowdfunding is a way to raise money through an online platform by asking a large number of people to each provide an amount of money to fund a specific project. There are four types of crowdfunding:
Reward-Based: Lenders donate to a project or cause they believe in. There can be a reward for lending, but many times lending is primarily a donation with no return on investment. Kickstarter and Indiegogo are two examples.

Donation-Based: Commonly used for charitable causes, where donors give to a cause without expecting any return for their ‘investment'. Kiva is an example of a donation-based site.

Equity: Equity crowdfunding provides a return to a lender, by giving the lender a portion of equity (ownership) in the company. Previously, only accredited investors could use a crowdfunding platform to invest in a business, but beginning in May, 2016, non-accredited investors (like you and me) will have the opportunity to invest in startups and other businesses. Of course there are rules and limitations, a summary of which can be found on The Securities and Exchange Commission Fact Sheet on crowdfunding.

Peer-to-Peer Lending: P2P lending involves sharing your idea with other people through online platforms in hopes they will invest in your business. The loans are usually provided by many different investors, and borrowers can often gain funds quickly and at a lower interest rate than through traditional financing programs. Examples of P2P lenders are Lending Club and Prosper. P2P is NOT currently available for borrowers in Iowa.

Bottom line, there are hundreds of crowdfunding sites you could choose from. So if you are looking at launching a crowdfunding campaign to fund your business, it’s important to do your homework and find a site that matches your needs.